Pivot Points: Simple Strategies for Forex Beginners
Forex beginners, pivot points might be just what you need. That’s if you’re looking for simple strategies to identify the forex market’s key levels.
They are a powerful tool used by traders. These tools determine potential support and resistance levels. And understanding how to use pivot points can help you make better trading decisions.
Read further as we’ll explain what pivot points are, how they work, and how you can use them to identify entry and exit points in your trades.
We’ll also provide simple examples to illustrate these concepts. So, let’s dive in and start mastering pivot points!
What Are Pivot Points
Pivot points are technical analysis indicators used to identify potential turning points in the market.
They are calculated based on the high, low, and closing prices of a previous trading session.
Once calculated, these points can be used to predict the support and resistance levels for the upcoming trading session. Sounds interesting, don’t they? Put on your Math hat and start punching those numbers.
Calculating Pivot Points
The main pivot point (P) is calculated as follows:
- Pivot Point (P):
P = (High + Low + Close) / 3 - First Support (S1) and First Resistance (R1):
S1 = 2P – High
R1 = 2P – Low - Second Support (S2) and Second Resistance (R2):
S2 = P – (High – Low)
R2 = P + (High – Low) - Third Support (S3) and Third Resistance (R3) (less commonly used):
S3 = Low – 2(High – P)
R3 = High + 2(P – Low)
Where:
- High is the highest price of the previous trading period.
- Low is the lowest price of the previous trading period.
- Close is the closing price of the previous trading period.
These levels can help traders to identify potential support and resistance levels, providing a framework for making trading decisions.
These levels help traders identify where the price might encounter support or resistance, providing potential entry and exit points for trades.
How to Use Pivot Points in Forex Trading
Pivot points can be used in various ways. However, they are most commonly used to identify potential support and resistance levels.
Here’s how you can use them effectively:
1. Identifying Key Levels
Price movements around the pivot point and its associated support and resistance levels can provide potential entry and exit points.
When the price is near a pivot point or a support/resistance level, it often indicates a possible reversal or continuation.
Above Pivot Point (Bullish Bias):
If the price is trading above the pivot point, it suggests a bullish bias. Traders might look for buying opportunities at the pivot point or the support levels (S1, S2).
Below Pivot Point (Bearish Bias):
If the price is trading below the pivot point, it suggests a bearish bias. Traders might look for selling opportunities at the pivot point or the resistance levels (R1, R2).
2. Simple Example
Let’s say the high, low, and close of the previous trading session for the EUR/USD pair were 1.1500, 1.1400, and 1.1450, respectively.
In this example and by applying the pivot point formula:
1.1450 is the pivot point, with 1.1500 as the first resistance level and 1.1400 as the first support level. If the price approaches 1.1450, traders will watch for potential reversals or breakouts to decide their next move.
Trading with Pivot Points: Putting Theory into Practice
Now that you understand the basics, let’s explore how you can use pivot points in your forex trading strategy. Here are a few common approaches:
1. Bounce Trading:
- Identify the pivot point (P) and support levels (S1, S2, S3).
- If the price falls toward a support level, look for signs of a potential reversal, such as bullish candlestick patterns.
- Enter a buy trade if the price bounces off the support level, aiming to exit when the price reaches the pivot point (P) or a resistance level (R1, R2, R3).
2. Breakout Trading:
- Identify the pivot point (P) and resistance levels (R1, R2, R3).
- If the price breaks decisively above a resistance level, it might indicate a potential upward trend.
- Enter a buy trade after the breakout, placing a stop-loss order below the broken resistance level.
- Aim to exit the trade when the price reaches a profit target or shows signs of reversal.
Combining Pivot Points with Other Indicators
Pivot points are powerful on their own, but their effectiveness can be amplified when combined with other technical analysis tools.
For instance, you might use indicators like moving averages or Relative Strength Index (RSI) to confirm potential entry and exit points identified by pivot points.
Important Note: Remember, forex trading involves inherent risks. Always practice proper risk management techniques, such as using stop-loss orders and maintaining a healthy account balance.
Benefits of Using Pivot Points
Pivot points offer several advantages for forex traders, especially beginners:
- Simplicity: Pivot points are straightforward to calculate and use, making them accessible for traders of all experience levels.
- Objectivity: Unlike some indicators that can be subjective, pivot points provide clear levels based on historical price data.
- Versatility: Pivot points can be used across different time frames and trading styles, from scalping to swing trading.
- Enhanced Decision Making: By providing clear support and resistance levels, pivot points help traders make more informed trading decisions.
In a Nutshell
Pivot points are a valuable tool for forex traders, providing clear levels of support and resistance that can guide your trading decisions.
By understanding how to calculate and use pivot points, you can identify potential entry and exit points, improving your overall trading strategy.
Open a demo account today with VT Markets to practice trading with pivot points and develop your skills without risking real money. Happy trading!